Earnings preview: what direction will Lloyds’ share price take?

Lloyds Banking Group’s [LLOY] share price had a volatile 2019. Investors and traders alike are hoping that Lloyds Banking Group’s share price does not repeat its 2019 performance, although so far it is showing some similarities.

Last February the share price traded around the 58p mark. But In 2019 Lloyds’ shares slid further to a low of 48.58p on 15 August to later reach an intraday high of 73.66p on 13 December. But by close on 19 February, the share price was back around the 56p mark.

With such large exposure to the UK economy, investor sentiment around Lloyds’ share price has dipped and risen in tandem with the Brexit saga’s twists and turns. Other headwinds that are putting pressure on the bank include dampening demand for mortgages in the housing market — another factor keeping a lid on consumer spending. Meanwhile, offshore banking customers prompted Lloyds to freeze 8,000 accounts in June.

Looking to the bank’s results Thursday (20 February), investors will be keen to see how these macro-economic issues have affected its balance sheet, and the company’s share price outlook.

Lloyds past financial performance

Brexit aside, Lloyds has been persevering. Its interim results for fiscal year 2019 revealed an overall positive direction of momentum. The bank had reported a robust underlying profit of £4.2bn alongside a strong return on tangible equity of 11.5%.

However, additional charges of £550m in Q2 relating to the mis-selling of Payment Protection Insurance (PPI) came at a heavy price, causing the bank to post a 7% fall in pre-tax profit to £2.89bn, with earnings also falling 7% to 2.70p per share.

In its full-year results, Lloyds is expecting a net interest margin of 2.9% with operating costs forecast to be under £7.8bn. Analysts are tipping a pre-tax profit of around £6.8bn for the 2019 year just ended, Alan Oscroft writes in the Motley Fool, compared with the £5.9bn in 2018.

Analysts at Credit Suisse expect the bank to report a “middling performance” for its full-year results compared with its peers and as such issued Lloyds’ share price with a neutral rating and a share price target of 60p a share.

Credit Suisse said the bank offered “the purest, most liquid exposure to UK macro”, although there was lots of uncertainty built into the price. They favoured banking stocks that had “an element of self-help” and weren’t entirely exposed to macroeconomic headwinds.

According to MarketScreener, Lloyds’ share price has a mean consensus of outperform and an average share price target of 65.61p.

Market Cap

£39.14bn

PE ratio (TTM)

19.89

EPS (TTM)

2.80

Quarterly Revenue Growth (YoY)

-7.50%

Lloyds share price vitals, Yahoo Finance, 19 February 2020

UK focus key to growth

Lloyds’ “successful” remodelling of itself as a UK-focused bank has helped it to grow profitability, explains Oscroft. “The balance sheet is a lot stronger now and its dividend has come storming back too. There’s a yield of 5.9% on the cards for 2019, which would be around 2.1 times covered by predicted earnings. Forecast rises for the next couple of years would take that to 6.4% by 2021,” he says.

However, Lloyds’ share price still remains vulnerable to Brexit and the economy.

“Lloyds shares started to tick up in December once the election results were known. But that was before our new prime minister committed us to a do-or-die pact, insisting that EU negotiations must complete in 2020,” Oscroft adds.

“Alas, from a 73.66p high on 13 December, the Lloyds Bank share price has slumped by 22%. It is exposed solely to the UK’s economic performance. And that might not be great with the latest forecasts suggesting overall weakening in 2020.” But it’s not just Brexit hanging over the share price.

“It is exposed solely to the UK’s economic performance. And that might not be great with the latest forecasts suggesting overall weakening in 2020” - Alan Oscroft

“I think the share price has further to fall,” says Kirsteen Mackay. “I’d continue to avoid it. I agree it looks good on paper, with a price-to-earnings ratio of 10 and a generous dividend yield, but I still think the uncertainty surrounding the economy makes it too risky.”

The low-interest rates, as well as the posed by challenger banks, could cause concerns too.

Andy Ross, writing in the Motley Fool, is more positive though. “As long as there are no nasty Brexit shocks, I think the Lloyds share price could smash the FTSE 100 this year because it has plenty going for it.”

“As long as there are no nasty Brexit shocks, I think the Lloyds share price could smash the FTSE 100 this year because it has plenty going for it” - Andy Ross

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